In the previous post, we looked at relative revenue growth and capex trends, updating my competitive telecom trend charts for the second quarter. But while revenue growth is important, profit is obviously moreso. Comparing profit directly doesn’t tell us much because it has too many pieces, not the least of which are very different levels of debt and amortization. In telecom, the common metric to measure the performance of the operations independent of the balance sheet is EBITDA – which has its own warts but gives us a commonality with which we can do comparisons after normalizing by revenue to get EBITDA margins. As always, EBITDA margin varies greatly depending on business model, with fiber-heavy companies having high EBITDA margin and high capex, and fiber-light companies the opposite. Here is the latest graph showing EBITDA margin trends across the sector since the beginning of 2008:
Not many surprises in this chart in Q2. Abovenet continues to push the envelope, and Cogent looks like they might challenge the 30% threshold soon. Deltacom has now been above 20% for two quarters now, continuing a clear uptrend and is definitelycreeping up on Sprint and Level 3. Most everyone else stayed within normal bounds, with XO and Global Crossing bouncing back from lower margins in the first quarter.
Secondly, we have the curious chart of EBITDA less Capex, normalized by revenue. This chart may be completely useless, or perhaps not – depends on your point of view. The idea is to track relative operating cashflow levels while neglecting working capital swings.
Messy, eh? What I’d note about Q2/10 is that it was boring across the board for this metric. Exceptionally boring for a chart that just went wild during the ugliest part of the recession – i.e. Q3/08 thru Q4/09. We’ll have to see just how that plays out in the third and fourth quarters. Sprint remains at the top of the list, which is because they are managing the business for cash flow. Abovenet is up there too, but I don’t think they’ll stay long as they are projecting capex to increase in the second half as they expand into new markets. The other one up at the top regularly here is RCN Metro. Although it has been growing steadily, we can see that the company has been conservatively managed as part of RCN. I wonder if they will be plowing more money back into the business once ABRY finally takes over.
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XO’s margins should have an asterisk. They use different expense/revenue recognition metrics than anyone else in the industry (this came up in the lawsuits against Icahn, XO expenses most capex as it is incurred, revenue is is recognized at the back end of the contracts). You might be comparing apples to oranges.
A big asterisk…. However, no one but minority shareholders with a significant stake understand this. No one in the investment community cares to look under the hood of XO being that it is a Penny Stock and it’s Chairman owns 90% of the company.